Free «Keynes’ "The General Theory" and Capitalism» Essay

Introduction

The general theory advanced by Keynes in his economics works has behavioural foundations that fit into the present real world economic situation. He was of the view that capitalism is inherently unstable since it seeks to establish a self-destructive entrepreneurial structure of selfish interests at the expense of paying more attention to psychological factors crucial in human decision-making (Keynes 2016). His assertion is that the economy is entirely driven by ideas since nature is not predetermined (Keynes cited in Phelps 2006). This easy aims at exploring Keynes’s The General Theory, its support for the vision of the inherent instability of the capitalist market economy, as well as implications for the design of fiscal and monetary policies.

Keynes’s View on Capitalism

Keynes (2016) maintained that capitalism is dynamic changing over time. Hence, he saw it as a machine that required constant update and maintenance to meet the current needs of society. He termed capitalism as individualistic and being motivated by both individual and cooperative wellbeing with the sole aim of profit making.

The Fragility of Capitalism

According to Backhouse and Bateman (2011), Keynes did not see stability in capitalism and considered saving as self-destructive behaviour in the long run. He pointed out that such market economy had created the notion of enjoying life after wealth accumulation through saving making people believe that life could not be enjoyed today. Keynes (2016) saw it as bluff since the accumulated wealth could be arbitrarily confiscated as a result of currency fluctuations, which could occur due to inflation. Also in time of war, like in the case of the world wars, the accumulated capital cannot be enjoyed at that moment because it lacks its value of exchange. It proves the instability of the capitalist market economy.

The Morality of Capitalism

Keynes (2016) did not criticize capitalism severely but instead saw its virtues. He was of the opinion that this market economy is indispensable, and without its efficiency in the distribution of economic forces, society will be prone to collapse. At this point, he noted that people continue to experience a dilemma between the moral and the failure of the community (Keynes cited in Backhouse & Bateman 2011). In this case, he saw the need for capitalism in society from the positive perspective if market forces are well regulated by the authorities to ensure morality.

Cultivating the Imaginative Life

At the end of The General Theory, his magnum opus, Keynes (cited in Hayes 2007) envisioned the future, in which material things would be scarce resulting in social change. His view was that profit maximization was of importance as an end for a higher end (Backhouse & Bateman 2011). Keynes was of the opinion that beyond utility maximization, people were motivated by other things, which were psychological in nature, such as paintings, freedom and good health. It also indicates the instability of the capitalist economy.

Keynes’ Theory Implications for the Design of Monetary and Fiscal Policies

Keynes foresaw the instability of capitalism and laid the foundation for the political, temporal stabilization of the economy from time to time through both monetary and fiscal policies (as cited in Crotty 2011). He assumed the degree of monopoly to be zero, and prices depended on individuals’ ability of being independent in taking action in the competitive market. The government uses fiscal policies to target the total level of spending and general composition of expenditures to check and formulate tax policies. Politicians also influence the latter through the central bank and use monetary policies to stimulate the economy and reach its slow or faster growth when facing the issue of inflation. In line with the Keynes’ vision, these are the major points of discussion at most cabinet meetings.

Regarding the fiscal policy, Keynes pointed out that at times of economic instability, the propensity to consume less is inevitable, and this forms the cornerstone upon which the government puts in place legislations that cut governmental expenditures at times of scarce revenue (as cited in Hayes 2007). Keynes (2016) argued that firms prioritize making profits rather than creating employment. In this light, for the government to have enough revenue, there is a need to channel a larger part of its budgetary allocation towards job creation. This achievement will enable the masses to pay more taxes providing the basic social amenities such as hospitals to ensure a healthy and productive society that can foster the growth of the economy.

Keynes’ monetary reforms were introduced during the inflation that followed the First World War (Backhouse & Bateman 2011). He was concerned about exchange rates and came up with the purchasing power parity, whereby the variation of two currencies had to be converted into a standard currency value. This development is the idea behind the foreign exchange market. The withdrawal of circulation money through the selling of government bonds by the central bank is  rooted in the Keynes’ idea of supply and demand (Hayes 2007). This approach helps in inflation control since the point of equilibrium is maintained. Interest rates also play a crucial role in maintaining economic balance encouraging or discouraging the circulation of money. If the government feels that there is plenty of money in movement and a need for curbing inflation, through the central bank, it increases interest rates to discourage the masses from taking loans while at the same time being encouraged to deposit for higher interests.

Conclusion

The Keynes’ school of thought is crucial to the wellbeing of the modern economy. His analysis of the capitalist market describes it as inherently unstable. Therefore, it leads to the need for government intervention. Such economy requires constant checks and balances through political influence by the legislature through governmental monetary and fiscal policies. The latter entail the regulation of its expenditure by the government, while fiscal policies are determined by the central bank to control the level of inflation.